The United States Court House at 312 North Spring Street, Los Angeles, California, which houses the United States District Court for the Central District of California, Western Division. The “Trial of the Century” was argued and decided here in early 1980.

Thursday, April 6, 1978. A day that would live in infamy, a red-letter date in the history of Hollywood. For it was the day that George and Marcia Lucas, on behalf of Lucasfilm Limited, filed suit against Paramount Pictures Corporation, controlled by Gulf+Western Industries, owned and operated by Charles Bluhdorn. The battle lines were drawn through Tinseltown swiftly, and brutally. Just days after their unqualified triumph at the Academy Awards, in which both halves of the creator couple went home with Oscars, the Lucases found themselves blackballed by an entire industry, at least for the most part. Marcia, who had worked as an editor for Desilu Post-Production since it commenced operations in 1971, remained with that outfit, as it was not owned by any film studio, but the television-oriented Desilu Productions, which (though it, too, engaged in the creative accounting practices which drove the industry’s profit margins) stood to lose far less from the precedent set by a successful lawsuit, especially given their plentiful legitimate revenue streams, from syndication and merchandising, along with their deals with RCA and Syzygy. Far more importantly, Lucille Ball liked Marcia Lucas, and always had; she no doubt saw something of herself in this younger woman’s character, and something of her ex-husband (and former creative partner) Desi Arnaz, still the great love of her life (and a close friend) despite their acrimonious and very public divorce, in Marcia’s husband George. But Desilu itself, though that studio had a great deal more clout and prestige than the Lucases did, would not be allowed to keep Marcia in its employ without consequences. Her Editing Unit B, which had focused largely on movies since American Graffiti, was “demoted” back to television – however, as none of the shows which were produced by the television divisions of the major studios would allow Marcia to work on them, Unit B became the de facto in-house unit, working on Rock Around the Clock, Three’s Company, The Muppet Show, Eunice, and Deep Space, among others. Though this reduced the burden on Unit A – the original television unit, headed by the multiple Emmy-Award-winning Donald R. Rode – it necessitated the creation of a Unit C to allow Desilu Post-Production to continue to work on motion pictures without tying Marcia Lucas to them. Ball herself took this with stride; Desilu Post-Production (like most every division of the studio) was thriving; why not expand further? Granted, one of their three units now functioned well below capacity, but Brandon Tartikoff, the studio’s VP Production, was a man positively brimming with ideas, many of them good ones. No doubt he could get more shows off the ground for Marcia and her team to work on in the coming seasons.

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George Lucas, for his part, decided to throw all of his energies into winning the lawsuit against Paramount. He had a great deal more pride than Marcia; theoretically, he could still get work on independent films and television commercials, but he felt them beneath his stature. Even prior to filing the lawsuit, still in the afterglow from the massive success of The Journey of the Force (not that he was personally seeing any of the dividends therefrom, of course), he had spent every spare moment searching for even a remotely credible litigator who had both the guts and the talent to take on one of the largest conglomerates in the world, and quite possibly emerge victorious. The ambulance-chasers had lined up to take on Paramount, no doubt hoping that the resultant publicity would bring them plenty of business, but George had received a valuable piece of advice from Marcia: “Never listen to anyone if all they do is just agree with you”, and it had guided his decision-making process. This had resulted in a great many rejections on his part. Another problem that George was facing was that most reputable lawyers demanded an massive upfront retainer and an exorbitant hourly wage ($50 per hour was not uncommon), and nearly everyone he had wanted to represent him had held firm on those two points. [1] Eventually, he finally resorted to the Yellow Pages in hopes of finding the right man for the job. He was more than halfway through the alphabet when he stumbled on the first prominent listing under T: “Taylor & Associates, specialists in contract law, contingent and alternative fees considered”. He couldn’t believe his eyes when he saw who was listed as the managing partner: Andy Taylor. The same name as the Sheriff of Mayberry from The Andy Griffith Show. He wasn’t sure if this was some kind of a sign, but figuring he had nothing to lose, he decided to call on Mr. Taylor, Esq.

Andy Taylor was, in fact, a “simple country lawyer”, from rural Maryland (which also qualified him – like his television namesake, who hailed from the fictional town of Mayberry, North Carolina – as being from the South). [2] But he was also a smart cookie: he had moved to Los Angeles to attend the USC Law School on a scholarship, and had in fact been a roommate of his fellow law student – and future Congressman – Marlin DeAngelo, with whom he remained close friends. Taylor was intrigued about the possibilities of taking on Paramount, but he was not sanguine about the chances of this lawsuit being successful. “You have a case, Mr. Lucas, there’s no doubt about that,” he remarked, upon studying the original contract with Paramount. “But the odds of you beating the army of attorneys Mr. Bluhdorn will unleash on you if you bring this to court are… well, I don’t even think there’s a word for how small they are. Even ‘negligible’ or ‘infinitesimal’ are probably highballing it, really.” Actually, he was lowballing it, but that was the custom in the legal profession. He knew that he very well could win the case, though it would certainly be a very steep uphill climb.

George sighed, this not having been the first time that someone had attempted to dissuade him from proceeding. “Look, Andy, I know what they’ll be throwing at me. I’ve built my entire career on beating the odds. They told me Graffiti would never work. Then they told me Journey of the Force would never work either. Called it ‘Lucas’s Folly’, even. Laughed at me before it even came out. Never gave it a chance. And now every halfway-decent lawyer in the entire Southland is telling me there’s no possible way I can beat Charlie Bluhdorn because he’s got more money – my money! – and his lawyers are better than anyone I could possibly afford. Please, just do me this one favour – never tell me the odds, all right? I’ve heard it all before. You said you think there’s a case here. Are you willing to represent Lucasfilm? That’s all I want to know.” It was a vanishingly rare moment for George Lucas – a moment of lost composure, of the impeccably professional, workaholic veneer cracking, and his baser instincts finally emerging after laying dormant for so long. Perhaps only his wife had ever seen his emotions laid bare like this, though no doubt even she would be positively shocked at this display, had she been present.

And to his credit, Taylor was impressed. “Well, Mr. Lucas,” he said, “I run a pretty small firm here, I make a fairly modest living – for a big-city lawyer, anyway – and I try to help the little guy. But I guess the little guy can come in all shapes and sizes, just as long as the other guy is bigger. And they surely don’t come much bigger than Gulf+Western.”

“Does that mean you’ll do it?”

“We’ve got enough of a case that they won’t impose Rule 11 sanctions on me if I try and bring it before a judge,” Taylor replied. [3] “And you may have come to the right place after all, because I think I have an ace up my sleeve. I happen to know a forensic accountant who really has a chip on his shoulder about how the Hollywood studios report their profits and losses. As a matter of fact, he’ll talk your ear off about it if you give him half the chance. He could be our star witness.”

George wasn’t sure what to make of the notion of an accountant being his star witness, but he knew beggars couldn’t be choosers. “Well, Andy, I look forward to working with you,” he said, after having gathered his thoughts. “I can’t make it official until I confer with my wife and business partner, Marcia, but I have a feeling she’ll like you when she comes back to meet you herself. I hope she does, anyway – she’s the best judge of character I know.”

Taylor smiled indulgently. “I look forward to meeting Mrs. Lucas,” he said, “and the three of us drawing up a contract of our own. One which won’t end in heartaches.”

As far as George was concerned, none of them had anything to lose.

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As it turned out, Marcia did like Andy Taylor, confiding to George that she found him to be “a real straight-shooter”. And with that, plans to bring the lawsuit forward in federal court commenced in earnest. On Thursday, April 6, 1978, a complaint was filed with the United States District Court for the Central District of California, Western Division, as Case No. 1:78-CV-00328-WJF, or more formally Lucasfilm Limited v. Paramount Pictures Corporation (just Lucasfilm v. Paramount for short, and the media universally referred to the case by this name), and served on Paramount that very same day; this allowed the story to lead the entertainment news and trade papers the following day. The Hon. Warren J. Ferguson would preside over the proceedings; in an odd coincidence, Ferguson shared his name with a (minor) character on The Andy Griffith Show, just as the chief counsel for the plaintiff did. [4] The complaint alleged breach of contract, fraud, negligent misrepresentation, and civil conspiracy on the part of Paramount; upon the deadline 30 days later, on the 6th of May, Paramount filed an answer to the complaint denying any and all allegations contained therein, and taking the opportunity to file a counterclaim of their own against Lucasfilm, for breach of contract. The stakes, once again, had clearly had raised. By this time, the media outlets had fallen into camps, depending (unsurprisingly) largely on their respective relationships with both companies, and on their economic ideologies. The Wall Street Journal vociferously supported Paramount, as did the Chicago Tribune and (unsurprisingly) the Los Angeles Times. (No major newspaper on the West Coast dared oppose Paramount – and therefore Hollywood – for fear of being blackballed). The New York Times and The Washington Post claimed neutrality; only populist tabloids (such as the New York Post) were unabashedly pro-Lucasfilm, which fit the David-and-Goliath tenor of the case. All of the Hollywood trade papers lambasted George and Marcia Lucas so viciously that Taylor threatened libel suits more than once; fortunately for them, he and his firm had their hands full with their present workload. Paramount’s chosen law firm: Gibson, Dunn, & Crutcher, one of the largest and most prestigious (and exorbitantly-priced) in the Southland, did not have this problem. [5] This massive disparity of manpower would provide the defense with a very powerful advantage throughout the duration of the judicial process; economies of scale applied to the judicial process.

Lucasfilm gave their answer on the counterclaim after another month had passed; just like Paramount, they had waited until the day of the deadline. There would be no backing down; the suit would be moving forward. It was on the twenty-sixth of June, a Monday, that a scheduling order was entered which set a nine-month period for “discovery” (in other words, evidence collection, through fact-finding and expert testimony) effective starting on the 2nd of July, 1978 (also a Monday). Though Judge Ferguson had a judicial record indicating that he might have been more sympathetic to the plaintiff, the relatively narrow window was in this case seen as highly preferential to the defendant; on the whole, though, the Judge seemed to be taking great pains to appear as neutral and unbiased as possible. “Discovery”, in legal terms, referred to three key components for the purposes of this case: interrogatories, or written questions which the other side is theoretically obligated to answer; requests for admission (leading questions typically associated in the popular imagination with the back-and-forth verbal jousting of trial theatrics); and document requests, which were self-explanatory. The last of these three would prove far and away the most time-consuming aspect of the prep work leading up to the trial for Taylor & Associates. On July 13th, Paramount issued their interrogatories, requests for admission, and document requests – Lucasfilm made their reciprocal request on the 16th, after that weekend.

It was in August of 1978, several months after the suit had been filed, that the wheels were firmly in motion. It marked the beginning of a long and contentious legal tug-of-war between both sides. What Taylor and his team wanted were “hot documents” from Paramount, which would prove their complicity in the willing fraud of Lucasfilm (resulting in the breach of contract), perhaps as part of a civil conspiracy. Paramount, naturally, was extremely reluctant to share any of their highly personal documents, being part of a highly competitive industry. But by the end of the month, Taylor was finally able to file a Motion to Compel, which would force Paramount to provide all the information that Lucasfilm needed to make their case. Two weeks later, the studio answered it, and the document flow finally began in earnest. But on Monday, September 25, 1978, at 4:30 PM, what employees at Taylor & Associates would forever after remember as “the deluge” arrived; a rental truck arrived at the firm’s office, offloading hundreds of bankers’ boxes, full to bursting with papers, file folders, and stuffed envelopes, among other things. All told, over a million pages were left behind when the truck pulled out of the Taylor & Associates parking lot. Every inch of space within their office was crammed full of boxes; Andy Taylor was forced to hire additional staff, needing the manpower to power through as many documents as possible before the end of the week. [6] Needless to say, this was not a reciprocal exchange; even if Lucasfilm did have as many documents for the other side to examine (and they didn’t – not even close), the attorneys for Paramount (and their staff) would have been able to sort through it far more quickly.

That Friday, a scant four days later (though effectively just three, in fact), Taylor was forced to report to Judge Ferguson (and the defense) in a hearing to confirm whether or not the documents produced from the Motion to Compel had any relation to those items he had requested. Obviously, his staff had barely begun to scratch the surface of the massive mound of paperwork – which, in keeping with the “deluge” reference, was often derisively called “the Tower of Babel”, also because virtually every document was useless (though technically provided under the terms of the Motion to Compel, most were obviously irrelevant to the case at hand, and were chosen for that reason) – what with re-arranging their office to find space for the excess material, and bringing on new workers to decipher what they had. Only a few thousand documents had been gleaned for information, and none were even close to sufficiently “hot” enough for Taylor to properly assess whether Paramount had properly complied with the motion. Sheepishly, he admitted this to Judge Ferguson. “Your honour, I regret that we’re still reviewing the documents Paramount were good enough to send to us,” he said, right after the chief counsel for the defense had gloatingly informed the judge that Paramount did indeed send over one million distinct pieces of information to Lucasfilm’s counsel. “I honestly have no idea whether or not they complied with the Motion filed.” George Lucas, who was in attendance at the hearing, grimaced at this, as did Taylor himself.

Judge Ferguson, meanwhile, was remarkably stone-faced and impassive. “Then I have no choice but to find for the defendant. Lucasfilm will compel no further information from Paramount for the duration of this case. Be satisfied with what you have now, Mr. Taylor, there will be no more forthcoming.” And for all Taylor knew, Paramount had given them one million pages worth of nothing. Even with killer testimony from his star witness, there were still ample grounds for a summary judgment against the plaintiff.

And as the weeks wore on, it indeed looked very much like Paramount had sent them a whole bunch of nothing. As Taylor was reading through weekly reports of the ticket sales of Journey of the Force at each one of the couple-odd-thousand screens on which it played over the course of its theatrical release, he ruefully remarked, “Well, what do you know, it looks like that movie really did play in Peoria.” That was about the best news he had to report to the Lucases by Columbus Day. George and Marcia weren’t thrilled, naturally (they had already heard about how much their film had appealed to Middle America), and for the first time, George had serious doubts about whether the lawsuit stood even the faintest hope of succeeding. Had Taylor hoodwinked him? Was that “simple country lawyer” act, in fact, not an act at all? Was he in way over his head? Taylor often wondered that himself; for the first time, he was a complete no-show for the entire campaign run of his old friend Rep. DeAngelo, though he still managed to win handily without him. (“I think you would probably need my help way more than I need yours anyway,” the Congressman had said – and he was right.)

But October and November marked the deposition period – in which each side would interview the key witnesses of the other (excluding outside experts). This was done outside of the courtroom, and away from the presence of Judge Ferguson. Despite aggressive questioning being done by sides (as they were going on what was commonly known as a “fishing expedition”, searching for weaknesses), little could be gleaned from any of the witnesses that could be perceived as devastating to the case of either side, until Alan J. Ladd, Jr. gave his sworn deposition. He was the Paramount executive who had green-lit The Journey of the Force in the first place, having brought Lucas to Paramount in exchange for the promise to make his film, and (accordingly) had been made privy to every aspect of production, including all matters financial. Under intense questioning, Ladd revealed that he had engaged in meetings with other Paramount executives during which the question of whether Lucas was aware that what he perceived as “profits” and what Paramount recognized as profits were not, in fact, one and the same had been raised. Taylor seized on this. “And did you turn these minutes over when Paramount was handed the Motion to Compel?” he asked, trying his best to couch his desperation in a practiced, conversational drawl.

“Nobody ever asked me for them,” Ladd replied, bemused.

And with that, Lucasfilm was back in the game again. As a result of Ladd’s sworn deposition, Taylor was now entitled to file additional interrogatories and document requests, this time with specific regard to the minutes referred to by the witness for the defense. Paramount, who were for the first time legitimately on the defensive, stalled and eventually produced the relevant documents, though heavily redacted; at the same time, they floated the offer of a settlement, which would entail a moderate-sized lump sum followed by a very large number of smaller instalment payments. Taylor was insulted on behalf of the Lucases, but reluctantly brought the offer to their attention. Marcia, wishing to return to editing for the movies again (“I liked working on Rock Around the Clock much better when it was called American Graffiti,” as she said to her husband), considered proposing a counter-offer, but she knew that George would hear none of it. She was right.

“Let it ride,” was all he said on the matter. And so they did.

Taylor and Paramount’s attorneys met once again on December 11, this time with Paramount reluctantly produced the minutes in a meaningful (and fully incriminating) format, thus effectively acknowledging that they had screwed Lucas out of his rightful earnings by any meaningful (and ethical) sense of the word. As far as the Lucases were concerned, it made for a delightful early Christmas present. However, Paramount formed part of an industry where profit had an entirely different meaning, one which was standard and universally accepted, and they would argue that when they went to trial… after the Lucases rejected their second offer to settle. Unfortunately for Paramount, the notoriously stingy Bluhdorn didn’t even raise the potential payout high enough to match Marcia’s originally planned counter-offer; she became convinced that they’d never get what they deserved unless they took the case to trial. Fact discovery closed with the end of the year; as of New Year’s Day, 1979, Taylor could make no further requests of Paramount for any additional documents. He had weakened their case, to be sure; but by no means had he hobbled it. Things could have been far worse.

For example, the “ace in the hole” on the part of Lucasfilm, the star expert witness, was obliged to submit to questioning by the defense in a deposition, which took place on February 15, 1979. This deprived the plaintiff from having the element of surprise at his disposal, but fortunately the witness acquitted himself admirably, proving himself unwilling to be shaken, rattled, or rolled by the high-priced army of lawyers at Paramount’s disposal. Paramount itself could produce no expert witnesses who possessed the same level of righteous indignation, which was a definite preemptive win for Lucasfilm. Indeed, Taylor was surprised that Paramount did not make yet another attempt to settle.

Nevertheless, after the close of expert discovery (and therefore of the entire discovery process) at the end of March, Paramount filed a motion for summary judgment at the beginning of May, hoping to skip the ordeal of bringing the case to trial, and believing Lucasfilm’s case (though stronger than originally perceived) to be weak enough to not withstand the judge’s scrutiny. All through the summer, the two sides exchanged procedural volleys until Judge Ferguson, walking the fine line he had done for the duration of the pre-trial, granted Paramount’s summary judgment motion in part (dismissing the Lucasfilm claim of civil conspiracy - one reason that Bluhdorn’s studio was thrilled to have dodged the bullet of surrendering further documents in discovery), but also denied it in part, allowing the Lucases to proceed to trial on the breach of contract, fraud, and negligent misrepresentation claims. He made this decision on October 12, 1979; the trial was scheduled to begin three months later.

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Finally, after nearly two years of legal maneuvering and wrangling, and sorting through mountains of documents, and dozens of depositions, the beginning of the trial proper was scheduled for Monday, January 14, 1980. Taylor, aware that the David-and-Goliath factor of the case would attract popular support, insisted that the civil case be brought before a jury of their peers, as opposed to a “bench” trial in which the verdict would be rendered by Judge Ferguson. Therefore, despite his inestimable influence, Ferguson would not be directly responsible for the outcome of the case. That the case would be decided by a jury had been known from very early on; however, Ferguson’s presence, and the impact of his judicial decisions, had been so closely scrutinized by the media that much of the public had been under the impression that he would also render the verdict.

Taylor had an obvious advantage over his more polished competition: he possessed a natural, seemingly effortless charisma and the ability to lead his opponents to underestimate his abilities. His rural, Southern heritage was disarming, and proved invaluable for the “little guy takes on the big bad machine” bent of his case, simply but powerfully urging the jury in his opening argument to ensure that justice be done, irrespective of the massive financial advantage enjoyed by Paramount, Gulf+Western, and indeed Charlie Bluhdorn himself, over the downtrodden creator couple of George and Marcia Lucas and their tiny company, who had earned (through dint of hard work) the recognition of their peers and the adoration of filmgoing audiences, and whose well-deserved financial compensation had been cruelly deprived from them by the ruthlessness of an already too-powerful film studio, which had learned nothing from the lessons that the changes in the industry ever since the Miracle Decision and the Antitrust case of thirty years prior (in which, fittingly enough, Paramount itself had also been the defendant). This appeal to justice and fair play, though rigorously based on the spirit of government statute and precedent set by carefully-chosen examples of case law, was definitely more emotional in its orientation than the counter-argument provided by the chief counsel for the defense, who (naturally) stuck with a very “letter of the law” interpretation, emphasizing that the contract was reflective of “clearly established and universally recognized” precedent, all but stating outright that George Lucas was an idiot if he could not understand this. The jury was obliged, so the defense argued, to punish George and Marcia Lucas and their attorney for their patently absurd lawsuit (by finding them liable for damages in the Paramount counter-suit). The wildly divergent strategies employed by both sides emphasized their differing stations: an observer of the proceedings would later describe their opening arguments as “something out of The Devil and Daniel Webster”.

Taylor built his case based his key piece of evidence, and the testimony of his expert. The evidence, those “hot documents” that he was finally able to locate after slogging through boxes and boxes of irrelevant scraps of paper thanks to the revelation from the deposition of Paramount executive Alan Ladd, Jr., were the minutes of a meeting between the officers at the studio reviewing new contracts made for their latest batch of upcoming productions, conducted in late 1976 (shortly after the Lucasfilm-Paramount deal had been signed). Multiple executives confirmed during this meeting that Lucas had been under the impression that “profits” represented revenues provided by ticket sales, less expenses incurred through production costs for Journey of the Force (the standard definition); whereas Paramount operated according to what was known as “Hollywood accounting” (also known as “creative accounting”), which calculated profit rather differently. These minutes were confirmed by inter-office memos, though they did not spell out this revelation quite as clearly or as brazenly as the minutes had done. Though the minutes might have seemed devastating to Paramount’s case, the studio planned to argue that even if Lucas were unaware, that was his fault, not theirs; their entire industry operated according to the “rules” of Hollywood accounting, and it was an accepted maxim of accounting principles than an industry could operate under standards that were different from what was generally accepted, so long as these were universally practiced. It was, in its way, a bold strategy, and one favoured by children the world over in dealing with their parents: “But everybody else does it!” That was where the star witness came in; he was the man who would ask the obvious rejoinder: “And if all the other movie studios jumped off a bridge, would you do that too?” Fortunately for Taylor, and for the Lucases, he was more eloquent and passionate than his willingness to respond to Paramount’s argument might suggest. His name was C.A. Baxter, and he was a forensic accountant.

An old acquaintance of Taylor’s, Baxter originally hailed from Buffalo, but moved to the West Coast to attend the USC School of Business, where he graduated magna cum laude, receiving his CPA before accepting a position at Price Waterhouse as a staff auditor. [7] There he had his only direct experience working in the entertainment industry when he joined the team that was responsible for auditing the results for the Academy Awards [8], doing so for a number of years as he put himself through graduate school, receiving an MBA and shortly thereafter departing the firm (though remaining on good terms with his former employers) to start his own private consulting and forensic accounting business. In the years since, he had become known as an opponent of the Hollywood accounting system, irate at how studios were exempt from the rising income taxes that all the other corporations and individuals were at least recognized as being obliged to pay. He had written a book on the subject, Hollywood Can’t Make Money, which had been published in 1976; it was roundly dismissed by insiders as a tawdry exposé and fell out of print. Fuelled by the publicity of the Trial of the Century and his high-profile role therein, his book would be re-published (with added material referring to Lucasfilm v. Paramount and his role therein) before the end of 1980, reaching the New York Times bestseller list.

During the round of depositions, Baxter had made his meaning plain, unwavering in the face of intimidation by Paramount’s attorneys. Much of his testimony was drawn from Hollywood Can’t Make Money, a tactic which he would repeat in the trial proper. Despite this, it was difficult for the defense to challenge his assumptions or get him to yield. “Who knew Mr. Smith could be an accountant?”, a Paramount executive idly wondered after the deposition had concluded. [9]

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Taylor, after Baxter had been sworn in to testify, asked his expert witness to introduce himself to the court at the beginning of his testimony, and then proceeded to launch into the first of his many definitional questions.

“Mr. Baxter, could you please explain revenue to the court?” Taylor asked.

“Revenue represents the gain of assets from the sales of goods or services,” Baxter said.

“Could you give the court an example of a good or service within the context of the motion picture industry?”

“Well, movie tickets sold would be classified as a good, although alternatively you could describe the opportunity to see the movie itself as a service provided by the venue.”

“And what are expenses?”

“They represent the loss of assets or the gain of debts incurred while in the process of manufacturing, purchasing, storing, displaying, or selling the goods and services that generate revenue.” [10]

“And could you please give the court of an example of an expense?”

“Well, usually when a film is in theatres you see commercials for it on television, or hear them on the radio. Those would be advertising expenses, because their goal is to sell more tickets to see that movie.”

“So how are revenues and expenses linked, exactly?”

“Well, the relationship between them is fundamental to the accounting discipline,” Baxter said. “Expenses incurred have to be matched to the revenues generated within the same accounting period, usually one year, for tax purposes. That is what enables direct links and comparisons between them, the simplest of which is that revenues minus expenses are equal to profit.”

“And what is profit, Mr. Baxter?”

“Profit is any surplus revenue derived from all costs related to the selling of goods and services. It is the net benefit of doing business. Virtually all businesses define their success or failure in relation to their profitability, and have done so throughout the history of commerce.”

“Are these your own definitions, Mr. Baxter?”

“No, although I do agree with them.”

“Do you have a recognized source for them?”

“I do. They are derived from the Generally Accepted Accounting Principles provided by the Financial Accounting Standards Board, a not-for-profit organization responsible for defining these terms in the public interest.”

“Let the record show that the witness is referring to the Generally Accepted Accounting Principles, or GAAP, a copy of which has already been entered into evidence. Mr. Baxter, under whose authority does the FASB operate?”

“The Securities and Exchange Commission, an agency of the United States federal government.”

“In your estimation, as a trained and certified member of your profession, would you say that means GAAP reflects the laws and policies of the United States government?”

“I would, yes.”

“Would you consider it unusual for a company to not pursue profit, Mr. Baxter?”

“By definition, all corporations seek profit; any that do not are explicitly called not-for-profit corporations, and are required to apply for tax-exempt status with the United States government. Profit is so fundamental to the operations of an economic entity that it is effectively doomed without it. In my years of experience, including during my time working at one of the largest public accounting firms in the world, I have never known any company, in any industry other than motion pictures, which has been unprofitable, even in the short-term – or even less profitable than in previous periods – to not radical overhaul their business plan, or overturn their board of directors and replace most, if not all, of their officers. And all of them have faced a catastrophic decline in stock prices as a result.”

“Could you explain to the court how the motion picture industry operates, based on your expertise, and on the research conducted for your book, Hollywood Can’t Make Money, which has been entered into evidence?”

“Yes, I most certainly can. For the last several decades of the motion picture industry’s existence, no film produced by any studio has ever shown a profit, in any year. Despite continuing to operate for decades, despite having been purchased by industrial conglomerates like Gulf+Western, which has dramatically improved their fiscal health, and despite continuing to pay out dividends – which are shares of these supposedly non-existent profits, mind you – to their owners, we would be led to believe by these studios that the Hollywood motion picture industry, as a business, has been a complete and total failure. For example, despite generating over one-half billion dollars in ticket sales since its initial release, Journey of the Force has apparently resulted in a substantial net loss for Paramount Pictures. In any other industry, such woeful mismanagement would result in immediate termination of everyone involved in that project – yet despite this so-called “New Hollywood” era, we see the same producers, executives, and officers working in each and every studio. However you choose to interpret the facts on the ground, the motion picture industry in the United States of America is fundamentally corrupt.”

“Objection!” came the inevitable cry from opposing counsel. [11]

“Sustained. The jury will disregard the last sentence uttered by the witness,” Judge Ferguson said. But, needless to say, juries were notoriously awful at pretending to have never heard that which they were supposed to disregard.

“Mr. Baxter, please inform the court, based on your research and understanding of accounting principles, how would it be possible for corporations in the motion picture industry to continue doing business without making a profit on any of the films they make, even the ones with record-breaking grosses?” Taylor continued, doing his best not to smirk.

“They overstate their expenses.”

“And how they go about doing that?”

“In any number of ways – whatever it takes to make them exceed revenues. Generally accepted accounting principles are based on an accruals system, and most of these accruals allow for the use of estimates. So any expenses that cannot be directly traced are overestimated – and then not corrected or adjusted when the actual figures come in. If that isn’t enough, then the costs of services rendered by company subsidiaries or affiliates are over-inflated – this is the advantage of increasing conglomeration in the entertainment industry; most goods and services are provided “in-house”. And if even that isn’t enough, then the unallocated costs incurred from different film projects are treated as expenses for the ones that generate more revenue. Ironically, this means that losses on movies that are genuinely unprofitable are therefore shown as much smaller than they really are, because they’ve been moved elsewhere. But in all cases, a studio will find the expenses they need to exceed revenues.”

“And what are the negative consequences of this?”

“Well, for one thing, companies don’t pay income tax on losses, only on profits. And the revenues generated by the film industry speak for themselves.”

“Let the record show that a report of industry-wide box-office grosses for the last decade has already been entered into evidence. Please continue, Mr. Baxter.”

“If a company is misleading about which of its goods or services is unprofitable, that will impact the decisions made by shareholders. It will also mislead creditors, who might be inclined to make decisions to loan money based on faulty risk assessment profiles. And it prevents potential investors from getting a clear picture of a company’s finances. The proper flow of economic resources is entirely dependent on transparency, and I can’t think of a single word less apt to describe the accounting practices that are prevalent throughout the motion picture industry.”

With that came another objection from the defense, though more perfunctory and less indignant than the one before. “Sustained,” Judge Ferguson repeated, this time eying Baxter. “Don’t make me do that again, Mr. Taylor. The jury will disregard the last sentence uttered by Mr. Baxter.”

“My apologies, Your Honour, but I have no further questions for Mr. Baxter.” Judge Ferguson raised his brow, but nodded, and with that, Taylor returned to his seat. He studiously avoided the gaze of the chief counsel for the defense; Baxter, however, glared at them, knowing that they would not be able to rattle him. Indeed, as their entire case depended on acknowledging what he said was true but then pointing out that it didn’t matter, their round of questioning largely consisted of highlighting his relative lack of experience with the entertainment industry, as if it was deserving of special treatment beyond outsider comprehension; a tactic with major potential for backfire.

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The rest of the trial proceeded largely without incident; the verdict arrived on Friday, February 29, 1980, Leap Day, after three days of deliberation (both sides having delivered their closing statements and arguments having concluded on Tuesday, the 26th). In the end, by a margin of nine-to-three, the absolute minimum majority (75%) needed for a verdict to be reached in civil court in the state of California, the jury found the defendant, Paramount Pictures, liable for breach of contract, fraud, and negligent misrepresentation (in other words, all counts) and were ordered to pay massive – and unprecedented – damages to Lucasfilm Limited.

The damages which the jury decided were owed to Lucasfilm were based on that studio’s share of the profits generated by the film in the United States, retroactive to the original breach (in 1976), and then with the interest compounded monthly to the end of the most recent period (January 31, 1980). Under the terms of the original contract, Lucasfilm was entitled to one-half of the net profits, estimated at nearly $150 million before interest. The punitive damages levied upon Paramount (for their blatant fraud) multiplied that total by approximately a factor of six, though there was some rounding involved, as there was no doubt that the jury liked the sound of the final figure at which they arrived: one billion dollars. Needless to say, that particular figure led the headlines around the world the next day. [12] The New York Post famously described the result as “LITTLE LUCASFILM WINS BIG BUCKS”, other papers (and tabloids) were even more crass in their use of titles, including a multitude of “force”-related puns. (The National Enquirer set the standard with “JURY USES ‘FORCE’ ON PARAMOUNT”). For the first time since Bluhdorn had purchased Paramount in 1966, the other investors (not to mention the creditors) were irate. It didn’t help that, ever since the trial had started, many protesters had gathered at the gates to the main Paramount studio on Melrose Avenue, armed with a battery of raw vegetables and plenty of signs, picketing the “corporate greed” and “criminal racket” that they believed endemic to the industry. Marcia Lucas herself, who worked next-door at Desilu, did her best to dissuade these protests, urging the assembled malcontents to trust in the judicial system (or at least, to contain themselves, as far away from Gower Avenue as possible). The crowd rapidly disbanded upon learning that Paramount would be paying through the nose for their… error in judgement.

The $1 billion which Paramount was due to pay Lucasfilm was a greater sum than the annual GDP of several dozen third-world countries. Stateside, by contrast, it took the US government a grand total of one day to spend that much money in their budget for FY 1979 – but the movie studios, Paramount included, were lucky to pull in that much revenue in a whole year. Their cash-on-hand was dreadfully low – every major studio had their most of their money tied up in either fixed assets, such as studio space (located on prime land in Hollywood and other central neighbourhoods), soundstages, and filming equipment; or intangibles, such as the copyrights for their film archives, and patents for new filming technologies. Although most of the Billion-Dollar Verdict would not be paid out by Paramount pending appeal (which the studio filed almost immediately, with the Court of Appeals for the Ninth Circuit), Paramount was still required to post a bond for the damages awarded, which would be theirs for a value of ten cents on the dollar, or $100 million – the largest bond ever posted in the history of the United States. Where Paramount would be able to find the money to post such a bond was one of the burning questions to emerge at this point in the saga, which would no doubt continue down the long road of appeals, heading for the Supreme Court or Bust. More pressing for Paramount, and indeed, for every studio in Hollywood, was that all the details of the case were now a matter of public record – and in an election year, the gory details of Hollywood accounting being laid bare to the voting public had dangerous, and previously unforeseen, consequences…

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[1] $50 per hour in 1978 dollars translates to roughly $185 per hour in 2013 dollars – this would break the bank for the Lucases, who had sunk all of the money they had made from Graffiti into Journey of the Force (along with the costs of raising their daughter, Amber). The upfront retainer would have cost about $5,000 ($18,500 today).

[2] Maryland, a border state, has in recent decades been increasingly regarded as a de facto part of the Northeast, due to the rapid growth of the Baltimore (and Washington, D.C.) suburbs. This was certainly far less true during the era that Mr. Taylor would have been born and raised. Even today, many Marylanders identify with Southern culture.

[3] Rule 11 refers to the obligation of lawyers to bring cases based in the law or in a “good faith extension” thereof; this theoretically serves to mitigate the threat of frivolous lawsuits, though obviously it has not eliminated them entirely.

[4] Judge Ferguson achieved considerable prominence as a jurist IOTL, having ruled on Haywood v. NBA, and later Sony v. Universal. In 1979, he was elevated to the Court of Appeals for the Ninth District by President Carter; obviously, ITTL, that does not happen.

[5] Gibson, Dunn & Crutcher were (and remain, under the abbreviated name Gibson Dunn) one of the largest and most successful law firms in the world; their OTL existence stands in contrast to the fictional Taylor & Associates. Their representation here as chief counsel for the defense is not meant to imply anything about the ethics or character of the organization (though I would be tickled if anyone connected with the firm ever did read this).

[6] Roughly one million documents would fit into approximately 350 bankers’ boxes, each of which is fifteen inches long, twelve inches wide, and ten inches high. The combined volume of all these boxes is 29 square feet, assuming a nine-foot-high ceiling. They would find room for all of them at the offices of Taylor & Associates, but it would be a very cozy fit – especially given all the excess bodies they have to cram into those confined quarters to help read it all.

[7] Price Waterhouse – which, IOTL, merged with another company, Coopers & Lybrand, in 1998, and is now known as PricewaterhouseCoopers – was, and remains, one of the largest public accounting firms in the world. It has audited the results of voting for the Academy Awards since 1934 (not coincidentally, at the ceremony immediately following the “tie” between Wallace Beery and Fredric March which was not actually a tie at all). And yes, this is the sole reason why Mr. Baxter worked at that firm; their presence in this timeline does not in any way reflect upon their relationship with the entertainment industry, nor with my (or their) stance on Hollywood accounting practices.

[8] Yes, this means that Baxter was made privy to the Oscar results prior to the opening of the envelopes at each ceremony. The final tallies in each category being proprietary information, he sadly could not divulge just how narrowly some of the victors had taken home their respective trophies.

[9] This is a reference to Mr. Smith Goes to Washington, which starred Jimmy Stewart, and was released in 1939 (the annus mirabilis of Hollywood).

[10] Some additional definitions: assets represent resources (tangible or otherwise) owned or claimed by the economic entity (company). These are almost always used to generate revenue, and the costs of utilizing or consuming these assets are one of the two main ways to define expenses. Debts (or liabilities) represent the claim upon assets by creditors; increasing these debts (through direct borrowing or interest) is the other main way to define expenses. All assets less all liabilities are equal to the equity or claim upon assets by investors into the company (this formula is called the accounting equation), and any profits are either retained as equity, or paid out (in dividends) to investors.

[11] This objection is due to the fact that “an expert witness may not opine as to the ultimate conclusion to the case”; Baxter crossed the line so blatantly that the chief counsel for the defense does not even have to provide grounds for his objection. But as that truism that litigators know so well goes: you can’t unring the bell.

[12] This amount is being reckoned on the short scale; that is, the number one followed by nine zeroes (ten to the ninth power). Today, it would be three billion dollars.

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And thus concludes the Trial of the Century! Many of you may be wondering why this instalment of Appendix C is labelled “Part IV”. Well, as everyone knows, the fourth part of a saga always comes first! No, actually I’m employing another classic George Lucas tactic: the retronym (which has also been brandished upon a certain other television series IOTL, but emphatically not ITTL). You can consider “Another Night at the Movies” to have been Appendix C, Part I; “Marcia, Marcia, Marcia” to have been Appendix C, Part II; and “Brand New Hollywood, Same Old Industry” to have been Appendix C, Part III. Appendix C will have six parts in all; two more will be forthcoming.

I hope you all enjoyed this update! It would not have been possible (nor anywhere near as good) without editing assistance (and encouragement) from e of pi, nor without the specialized advice of my legal consultant, Andrew T, with whom I collaborated closely in an effort to accurately reflect the proceedings of a civil trial. Any remaining errors or misconceptions to be found in this update, however, are solely the fault of my own, and I apologize profusely for their presence.

And Happy Canada Day (still Dominion Day, ITTL), everyone! I realize that coverage of the Trial of the Century, which takes place in American federal court, may not seem patriotic, but I can assure you that Canadian media outlets covered the trial with just as much zeal as the Americans did. That’s how the maple sugar cookie crumbles!

Thus concludes the 1979-80 cycle, and (for all intents and purposes) the 1970s! Everybody get ready for the totally tubular decade which lies ahead…